Family Business in Taiwan: Current and Future Challenges

29 June 2007 The Asian Family Enterprise Forum

Family Business in Taiwan:Current and Future Challenges

Kuang S. Yeh, Ph.D.Hsi-Mei Chung, Ph.D.

Family Businesses Research Center


Family Business in Asia:Characteristics of Corporate Governance in East Asia

Pyramid Structure Cross-shareholding Interlocking Directory Principle-Principle Problem

Expropriation of minority shareholders About 60% of public companies are family

controlled


Family Business in Asia: Control of Publicly Traded Companies in East Asia

*Source: Claessens, Djankov, & Lang, 2000, “The separation of ownership and control in East Asian corporations”, Journal of Financial Economics, 58(1/2): 81-112.


Family Business in Asia: The Concentration of Family Control in East Asia

*Source: Claessens, Djankov, & Lang, 2000, “The separation of ownership and control in East Asian corporations”, Journal of Financial Economics, 58(1/2): 81-112.


Corporate Governance Environment in Taiwan

Taiwanese listed companies are typically family-controlled

Characteristics of the listed market in Taiwan The absence of effective audit committees Low institutional ownership An inactive market for corporate control Independent directors may not independent


Family Control in Taiwan: Evidence in 1994 & 1995

For a 208 Listed Companies Sample in Taiwan 51.44% of the listed companies in Taiwan are

controlled by the Family Average shareholding by the largest family is 26%

Focus on the control rights, not the cash flow rights The sum of direct and indirect ownership by the largest

family shareholder exceeds the firm’s critical control share level

Family member serves as the CEO, Chairman or hold more than half of board of directors


Family Control in Taiwan: Evidence in 1997 & 1998 (1)

For a 251 Listed Companies in Taiwan Using the 20% control cut-off criteria, 58.2% of the

listed companies in Taiwan are controlled by a family

Under the family-controlled listed companies, the control rights and cash flow rights diverge more than for other types of ultimate control structures

The stock collateral ratio is highest in the family-controlled listed companies The more serious agency problem in the family-

controlled listed companies


Family Control in Taiwan: Evidence in 1997 & 1998 (2)

For a 251 Listed Companies in Taiwan Higher cash flow rights are associated with higher

market value, while deviation of control from cash flow rights reduces corporate value, especially for companies under family control

The higher the collateralization of stock shares of the controlling shareholders, the more severe the agency problem and the lower the corporate value

The expropriation of minority shareholders is more serious in the family-controlled listed companies


1998 Family Control in The Listed Companies in Taiwan

*Source: Yeh, Ko, & Su, 2003, “Ultimate control and expropriation of minority shareholders: New Evidence from Taiwan”, Academia Economic Papers, 31(3): 263-299.


1998 Enhancement Mechanism by Controlling Shareholders in TaiwanUltimate Control Family

Control Other

Control Widely Control

Sample No. 146 30 75 Control (%) 38.34% 39.29% 11.15% Cash100 (%) 31.69% 38.48% 9.66% Cash 0 (%) 19.39% 35.86% 6.25% Cash 100/Control 0.81 0.97 0.89 Cash 0/Control 0.5 0.89 0.58 Cross-shareholding 0.48 0.23 0.32 Pyramid Structure 0.29 0.23 0.15 Participative Management 0.54 0.43 0.39 Stock Collateral Ratio (%) 32.82% 5.69% 27.86% *Source: Yeh, Ko, & Su, 2003, “Ultimate control and expropriation of minority

shareholders: New Evidence from Taiwan”, Academia Economic Papers, 31(3): 263-299.


Family Control in Taiwan’s Listed Companies: Evidence and Findings (1)

The critical shareholding level of family control is inversely related to the company’s size

Families can gain effective control over larger companies with lower levels of shareholding The average control by the largest family is 26%, and

that families need only 15% control, on average, to control a firm effectively for a 208 sample of Taiwanese listed companies in 1994 & 1995



No performance difference between family and non-family companies in 1994 & 1995 However, Family-controlled companies that have

low levels of control have lower relative performance than both family-controlled companies with high levels of control and widely held companies

In family-controlled companies with higher shareholding, expropriation is less desirable because the family bears more of the costs


Family Control in Taiwan’s Listed Companies: Evidence and Findings (3) The expropriation of minority shareholders is

more serious in the family-controlled listed companies in the 1997 & 1998 Sample The deviation of control and cash flow rights

is greater in the family-controlled companies than other type companies

The collateralization of stock shares is greater in the family-controlled companies than other type companies



The more serious the expropriation of minority shareholders, the lower the market value

The 1997 & 1998 sample implies that the family-controlled listed companies have the lower market value

Family Control perform worse than other types of listed companies in the 1997 & 1998 sample


Family-controlled Business Groups in Top 100 Business Groups

Year 1988 1992 1994 1996 1998 2000 2002

Manufacturing

68 65 69 67 48 40 33

Service 14 17 18 18 27 22 20

Others 1 1 1 1 1 1 1

Total 83 83 88 86 76 63 54

*Source: China Credit Information Service, 1990 to 2004, 1990 to 2004 Business Groups in Taiwan


Business Name

Industry Trait Family Controlled

Number of Affiliates

Succession or not

Formosa Chemical & Plastic Manufacturing

○ 17 1st Generation

Cathay Financial Service ○ 7 1st GenerationShin Kong Financial Service ○ 20 1st GenerationChina Trust Financial Service ○ 15 1st GenerationFar East Textile, Apparel &

Leather Manufacturing○ 22 1st Generation

Hualon Textile

Textile, Apparel & Leather Manufacturing


Tatung Electronic & Household Appliances


Yulon-Motor Transportation Manufacturing


Tuntex Textile, Apparel & Leather Manufacturing

○ 19 2nd Generation

Chung-Shing Textile

Textile, Apparel & Leather Manufacturing


The Profile of the Top 10 Business Groups in 1988

Source: China Credit Information Service, 1990, 1990 Business Groups in Taiwan


Business Name


Number of

Affiliates

1988 Top 10

Succession or not

Cathay Financial Service ○ 31 ○ 2nd GenerationMega Holdings

Financial Service × 24 × --

Formosa Chemical & Plastic

Manufacturing

○ 105 ○ 1st & 2nd Generation

China Trust Holdings

Financial Service ○ 143 ○ 1st & 2nd Generation

Hua Nan Holdings


First Holdings


Shin Kong Holdings

Financial Service ○ 102 ○ 2nd Generation

Fubon Holdings

Financial Service ○ 46 × 2nd Generation

Far East Textile, Apparel & Leather

Manufacturing

○ 139 ○ 2nd Generation

Sino-Pac Holdings

Financial Service ○ 45 × 2nd Generation

The Profile of the Top 10 Business Groups in 2002

*Source: China Credit Information Service, 2004, 2004 Business Groups in Taiwan


The Profile of the Top 10 Manufacturing Business Groups in 2002

Business Name


Number of

Affiliates

1988 Top 10

Succession or not

Formosa Chemical & Plastic ○ 105 ○ 1st & 2nd Generation

Far East Textile, Apparel & Leather


UMC Electronic × 93 × --TSMC Electronic × 14 × --China Steel

Steel × 88 × --

Quanta Electronic × 29 × --Yulon Motor

Transportation Manufacturing


Walsin Lihwa

Electronic Wire & Mechanics Equipment

○ 124 × 2nd Generation

President Food ○ 202 × 1st & 2nd Generation

Kinpo Electronic × 75 × --*Source: China Credit Information Service, 2004, 2004 Business Groups in Taiwan


Family Control Business Groups in Taiwan: Evidence and Findings (1) Family-Controlled groups are decreasing after

2000 The industry transition in Taiwan before and after

2000 Percentage of family directors and family

managers are decreasing However, Percentage of institutional directors are

increasing Family-controlled groups often use “pyramidal

structure” and “cross-shareholding” to handle the needs for growth and control


Family Control Business Groups in Taiwan: Evidence and Findings (2)

Evidence from 30 Family-controlled groups for the past 14 years (1988-2002)

If the family members occupy more CEO or board of directors seats within the group, this family-controlled group is less likely to diversify into related and the unrelated product fields

The inverse relationship between family control and product diversification

Family control limits the growth of strategic change in family-controlled groups



Family Controlled Groups have to include more non-family professional managers to deal with the growth need However, Family members still dominant in the inner circle

Family control would be helpful for the group’s performance after the market-oriented transition Comparing 1973-1988, and 1988-1996 two time periods;

After 1988, during the market-oriented transition, family and prior ties would improve group performance

The performance implications of family tie is inversed U shape



Comparing the family and non-family controlled groups Family-controlled groups are less likely to

diversify internationally than the non-family controlled groups

Family-controlled groups are more likely to cross-sharing within groups than the non-family-controlled groups


Family Business in Taiwan: Evidence (1) Family control still dominant the listed

companies in listed market Family-controlled groups are decreasing after

2000 The dominance of electronic business groups The number of family controlled groups in the

electronic industry is lower than ones in other industries

Family-controlled groups and listed companies are likely to use “pyramidal structure” and “cross-shareholding” to control the enterprises


Family Business in Taiwan: Evidence (2)

Family control does not significantly influence the listed company’s performance in the 1994 & 1995 sample

The expropriation of minority shareholders is more serious in the family-controlled listed companies in the 1997 & 1998 sample

The 1997 & 1998 sample implies that the family-controlled listed companies have the lower market value


Family Business in Taiwan: Evidence (3)

Family control and ties are helpful for the business group’s performance after the market-oriented transition (after 1988), but the positive effect will attain a threshold after reach a certain point The possible new evidence of the family control

on group’s performance after 1996, or even after 2000


Family Business in Taiwan: Research and Challenges (1)

Very few systemic research in the area Succession issues in family enterprises in

Taiwan Corporate governance issues after family

businesses go public Transition from family to professional

managed enterprise


Family Business in Taiwan: Research and Challenges (2) International expansion of the family

enterprises in Taiwan More researches to provide evidence on the

linkage between the competitive advantage and family control

Comparison between Taiwan and other East Asia Region’s family business is lacking


Thank You for Listening

Family Business in Taiwan: Current and Future Challenges

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